“Gold, is a bargain, below $1000 an ounce…” Richard Russell Dow Theory Letters

I have written previously that if the Dow breaks below its November 20, 2008, 7552.29, it would be a sign of things to come, particularly if Economic Cycle Research Institute’s (ECRI), Weekly Leading Index (WLI) was to begin declining in a persistent way. The WLI had risen for four weeks in a row. It was a good sign and I was hoping for the best but then it declined for four weeks in a row. If this continues I would expect the Dow to slump below 7552.29 which would be a serious break down for the stock market and a signal of prolonged distress for the economy.

On Friday, February 13, the WLI was down for the fifth week in a row. I doubt that many people realize how important these next few weeks are going to be. We need to see the Dow and the WLI turn up in a persistent and pervasive way or things are going to begin to look even worse than they do now. If the WLI continues to decline I would expect to see the stock market decline in a decisive manner followed by a big dose of unemployment!

On Friday, the Dow was down 82.35 to close at 7850.41, only 298.12 points above its November 20, low. Gold was down $6.90 to close at $941.00. Gold is only $62 from its all time high set in March 2008, of $1003.00. Many experts believe that once gold breaks through this resistance level gold will be off to the races again.

In this weeks Barron’s, Sandra Ward interviewed Ray Dalio. Dalio, was one of the few who warned about the dangers of “excess financial leveraging.” His clients include world governments and central banks according the Barron’s article. Dalio believes that dollar devaluation is the only way out of this mess!

In his February 12, 2009, daily remarks section, Richard Russell, Dow Theory Letters wrote, “The bailout plan — The cost will be upwards of $2.5 trillion. How will these enormous debts ever be repaid? Answer, they won’t be repaid. The alternatives — the dollar will collapse along with world fiat money, or the dollar will be devalued against gold. A devalued dollar decreases the burden of debt. The debt is denominated in dollars. If the dollar is devalued (worth less) the burden of debt is decreased. If the dollar is devalued, what will the future price of gold be in terms of dollars? Nobody knows. Gold in 1980 hit $850. If gold is adjusted for inflation, gold today should be at least $2200 an ounce in dollars.”

I have followed Russell since 1991. He began recommending gold shortly before the bull market for gold began in August 1999. He seems to be as bullish today as he was then. He went on to say, “I continue to think gold below $1000 is a bargain. Once gold is over $1000, it may move into a highly speculative run-away mode.”

Remember, “it would be foolish to acquire gold for the short term but it would also be unwise not to own some gold for the long term!”